As a first-generation American, I was instilled with the privilege of education at an early age. My grandparents left their life in Soviet-occupied Ukraine in the 1970s and, with my parents in tow, emigrated to the United States dreaming of security, success, and access to higher education. Years later and with limited resources, my grandmother funded a substantial portion of my college education, leaving me a legacy that I’ll always remember.
Today, as a CERTIFIED FINANCIAL PLANNER® professional and enrolled agent, I have the privilege of working with families that, like mine, want to pass along the value of education to their grandchildren. A 529 college savings plan allows you to do that while continuing to build and maximize your family’s multigenerational wealth.
A 529 plan is a tax-advantaged investment account that enables you to invest in future education costs. You often hear of parents opening a 529 plan account for a child, but grandparents can also gift a legacy of education by opening an account for a grandchild or grandchildren. The investment has potential to grow tax-deferred—and withdrawals, including any earnings, are tax-free when used for paying qualified education expenses.1
Qualified education expenses generally include:
- College tuition and fees associated with community colleges, four-year universities, graduate schools, and vocational/trade schools
- Books and supplies, including textbooks, paper, pens, computers, software, internet service, and other necessities
- Room and board, including on-campus meal plans and dorm fees, as well as food expenses for students living in off-campus housing
- Special-needs services and equipment, including wheelchairs and certain transportation costs
- Education loan payments, apprenticeship programs, and K–12 tuition that are allowed by certain plans
In 2024, an individual can contribute to a 529 plan account up to $18,000 ($36,000 for a married couple) per beneficiary per year without incurring federal gift tax. The total contribution counts as a completed gift for estate-tax purposes and removes the gift (along with any earnings) from the individual’s taxable estate, allowing them to maintain control of the investment and the beneficiary designation. For more information, options, and answers to frequently asked questions about 529 plans, read 529 Plan Benefits You May Not Know About.
Tax Savings and Estate Planning
In its simplest form, a 529 plan increases the spending power of the principal invested in a loved one’s education. For those nearing the lifetime exemption amount for estate and gift tax (currently scheduled to decrease substantially in 2026), this is a great tool for retaining more of the family wealth. The advantages for tax savings and estate planning become even more interesting when we explore “superfunding” a 529 plan account.
Superfunding allows for up to five years’ worth of contributions to be made at the same time. This means an individual can contribute up to $90,000 in a single year to a particular 529 plan account. Their spouse can gift an additional $90,000, for a total contribution of $180,000 per beneficiary. (IRS Form 709 is used for treating the entire gift as a series of five equivalent annual gifts.)
Superfunding creates an opportunity for gifting a lump sum all at once, which will allow the principal to begin its tax-free growth sooner. Imagine you have four young grandchildren. You and your spouse could potentially remove $720,000 from your taxable estate in one year without incurring gift tax, stretch the value of the investment by not paying tax on its growth, and likely fund a significant portion (if not all) of your grandchildren’s education.
Let’s look at the numbers for two different grandchildren, assuming current valuations and a compounded annual return of 5%:
| Grandchild 1 – Not utilizing a 529 plan
Grandchild 1 needs $200,000 to pay the tuition for their education. Ten years ago, you invested $125,000 in a taxable brokerage account that earned a 5% annual rate of return. When Grandchild 1 began college, you liquidated the investment and set aside the now $203,612 to pay annual tuition directly to the institution (to avoid gift tax). But because your investment earned $78,612 over time, you had to pay capital gains tax of 15% on those earnings (almost $12,000). This left you with $191,820, which is not enough to cover the full cost of tuition. |
| Grandchild 2 – Annual 529 plan contributions of $18,000
Grandchild 2 will begin attending college in 10 years, and you want to cover their tuition and other qualified education expenses. After determining that they’ll need a total of $255,000, you open a 529 plan account with $18,000 (thereby avoiding gift tax) and commit to contributing the same amount for the next 10 years—for a total of $198,000. Your investment will grow to approximately $255,700, and the earnings of $57,700 will go entirely to Grandchild 2, sparing you almost $9,000 in capital gains tax. By contributing to their 529 plan account, you will have lowered the principal and growth of your taxable estate, created more spending flexibility, and avoided paying gift tax. |
| Grandchildren 1 and 2 – Superfunding
Lastly, let’s assume that you and your spouse want to superfund the education expenses for both grandchildren. Together you invest $180,000 per child at the same time, and the total one-time gift of $360,000 grows to $586,402 ($293,201 per child) in 10 years. In addition to avoiding approximately $34,000 in capital gains tax on the $226,402 of earnings, you’ve removed more than $500,000 from your taxable estate and helped set up both grandchildren for a successful future. In short, you’ve created an invaluable gift that your grandchildren will always remember. |
The above examples are for illustrative purposes only.
Beyond its favorable tax treatment, a 529 college savings plan is a dynamic and flexible gifting tool that allows you to leave a valuable legacy to a loved one. To learn more, reach out to your wealth advisor. If you’re not already working with Mercer Advisors, contact us.
1 To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a section 529 account, such withdrawal must be used for “qualified higher education expenses,” as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. The beneficiary must be attending an eligible educational institution at least half-time for room and board to be considered a qualified higher-education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. You can also take a federal income tax–free distribution of up to $10,000 per calendar year per beneficiary from each 529 account to help pay for tuition at an elementary or secondary public, private, or religious school. Qualified higher-education expenses now include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the designated beneficiary or a sibling of the designated beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the designated beneficiary will count toward the lifetime limit of the sibling, not the designated beneficiary. Such repayments may impact student-loan interest deductibility. State-tax treatment may vary for distributions that pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school, apprenticeship expenses, and payment of qualified education loans.
